Friday, 19 June 2015

Smith & Wesson: on target for more success

I titled my last update on Smith & Wesson (link here) 'straight shooting (and should you sell the big bounce?)' and that debate continues apace with the shares very nicely up YTD but up quite mildly over the period since I wrote April's report (after a big previous quarterly earnings disclosure increase)...


...and especially after the fall post close yesterday as Seeking Alpha noted:

Smth & Wesson (NASDAQ:SWHC) -3.7% AH after beating FQ4 earnings and revenue expectations but issuing downside guidance for FQ1. SWHC now sees adjusted FQ1 EPS of $0.21-$0.23 vs. $0.28 analyst consensus estimate, and revenues of $140M-$145M vs. $146.5M consensus.For FY 2016 ending April 30, 2016, SWHC forecasts adjusted EPS of $1.02-$1.07 and revenues of $605M-$615M, vs. analyst expectations for EPS of $1.04 and revenues of $601M.FQ4 sales in the firearm division totaled $166M, down 2.4% Y/Y; full-year firearm revenues fell 15% Y/Y to $531M, which CFO Jeff Buchanan says reflected a return to a more normal consumer firearm market following the earlier surge, but says inventories fell by $20M during the quarter.


I noted in my April link that the company's shares on balance had scope to push much deeper into the US$15-20 range and after listening to the conference call from the company I would reiterate this view.  Clearly shorter-term expectations - as noted above - were a bit too hot going into numbers but inherently the company is doing a solid job.  A few conference call highlights:

Operational / current trading - progress here remains good 

'very pleased...strong year end performance'

Accessories strong, 'very pleased', on track.  10% of revenue, strong potential at 'attractive' good gross margins

Pistols strong

2nd strongest May ever, handgun checks up 10%

Products 'popular' in handgun and modern sporting


Guidance - some mild evolutions here, FY16 guidance a little opaque as they continue to invest.  I am not overly worried however because the key is always product - which remains strong

Want keep ebitda margins above 20%

'continue to expand our product offering'

Developing next gen M&P pistol

'16 'typically don't give detail...but give range'

re ebitda margin 'low end of expected range' 37-41%, think be in but at low end

product mix, absorption

'heavy promotional environment'


The future look/shape of the company - if they cannot find good deals to augment then buybacks will occur which, of course, is eminently sensible

'all about taking share' and expanding

use of revolver debt agreement - share buybacks if don't hit hurdle rate, debt cheap

'forecasting less challenging'

'normalised environment' re competitor's inventory

'more confident than ever before with our forecast'


Inherently there is no problem here at all.  Free cash flow for their FY15 equated to around 10% of market cap and net debt is modest as one of the revolver debt deals remains untapped.  From my perspective for FY16 the company trades on a high single digit EV/ebit multiple which just feels too low to me - especially in an environment where key broader industry competitors like Colt are in deep restructuring problems.

So a conclusion: I am keeping hold of my Smith & Wesson shares and I can see them hitting US$20/share over the next year.  A break below a US$15/share price should be viewed as an opportunity to augment given industry and company specific fundamentals.

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